Simple Interest Calculator
Understanding Simple Interest
Simple interest is a straightforward method of calculating the interest charged on a loan or earned on an investment. Unlike compound interest, which calculates interest on the initial principal and also on the accumulated interest from previous periods, simple interest is calculated only on the original principal amount.
How Simple Interest Works
The formula for calculating simple interest is:
Simple Interest (SI) = (P × R × T) / 100
Where:
- P represents the Principal amount (the initial sum of money borrowed or invested).
- R represents the Annual Interest Rate (expressed as a percentage).
- T represents the Time period (in years) for which the money is borrowed or invested.
Total Amount After Simple Interest
To find the total amount you will have after a certain period, you add the calculated simple interest to the original principal amount:
Total Amount (A) = Principal (P) + Simple Interest (SI)
When is Simple Interest Used?
Simple interest is commonly used for short-term loans, such as:
- Personal loans
- Payday loans
- Short-term business loans
- Some savings accounts or certificates of deposit (CDs) where interest is paid out periodically.
It's also a good way to understand the basic cost of borrowing or the basic return on investment before considering the more complex nature of compounding.
Example Calculation
Let's say you take out a personal loan of $5,000 (Principal) with an annual interest rate of 7% (Rate) for a period of 4 years (Time).
- P = $5,000
- R = 7%
- T = 4 years
Using the formula:
Simple Interest = ($5,000 × 7 × 4) / 100
Simple Interest = $140,000 / 100
Simple Interest = $1,400
The total interest you would pay over 4 years is $1,400. The total amount to be repaid would be $5,000 (Principal) + $1,400 (Interest) = $6,400.